The Shadow Banks of the Barrio

Maria Ramos holds a large, faded ledger propped open on her lap. The ledger was a gift from a beauty products supplier, an oversized agenda for 2014. Over time, it has become a repository of balance sheets—a record of the debts she’s accrued with neighborhood lenders known as prestamistas. At the moment, she’s paying interest on three loans totaling $14,000. She makes weekly payments, but the debt never seems to drop.

Ramos, 64, owns a beauty salon in Manhattan’s Washington Heights. In order to open her business, she borrowed money from three lenders who charge her 3 percent each week. “I can’t sleep sometimes,” she says, sitting in one of the worn chairs where she cuts her clients’ hair. “I spend the night thinking about the debt.”

Prestamistas serve as underground banks of last resort for many Latino immigrants. In New York City, which has the country’s second-largest Latino population, these unregulated moneylenders are familiar characters in several neighborhoods.

Such informal financial services operate in a gray zone that caters to those with no access to credit from traditional sources. But, like the payday loan operations that they resemble, prestamistas charge sky-high interest rates and can swiftly bury borrowers in debt. They also remain cut off from the U.S. financial system, hindering their economic progress and trapping them in a vicious cycle.

It’s hard to find hard numbers on the amount of money changing hands in the shadows. But evidence suggests the figure is in the tens of millions in New York alone: The Neighborhood Trust Financial Partners, which trains people from low-income backgrounds to participate in the U.S. financial system, has reports of cases where a single individual obtained up to $900,000 in informal loans.

A 1996 survey by the Washington Heights and Inwood Development Corporation (WHIDC), found that informal lenders handled about $10 million in loans in just 10 blocks in Washington Heights.

Immigrants in U.S. cities have long relied on lending circles that allow members to pool funds and provide small loans to each other; such methods have helped generations of newcomers establish themselves. According to a U.S. Financial Diaries research study of more than 200 low-income households, loans from family and friends are the second-most common credit choice in the United States.

Traditional banking institutions present particularly large barriers to newcomers, who might lack the credit history and other documentations needed to obtain loans. In 2015, some 45 million people had no credit history, and a study by the Consumer Financial Protection Bureau shows that Hispanics are more likely than African Americans, Asians, or whites to be “credit invisible.”

Among new immigrants who aspire to own a business and need funds, prestamistas are considered essential financing tools, says WHIDC director Dennis Reeder. His three-decade-old group offers an alternative: microloans to small entrepreneurs in the community, most of them Latino, with low annual interest rates.

The WHIDC also tries to make Washington Heights residents more aware of the risks of using these moneylenders. But for many, the benefits simply outweigh those risks. “It would be impossible for them to survive without lenders,” he says, “which is why they use them.”